31 Jan Reverse Mortgage: Solution or Scam?
When Jeannie was having trouble making ends meet after her husband died, she asked my friend Jim what he thought about reverse mortgages. Jim spent 40 years in the financial services industry, and these guys tend to be wary of things like life insurance and reverse mortgages. As predicted, Jim told her it was a very bad idea. To her credit, Jeannie ignored Jim and decided to go through with a reverse mortgage on the home she and her husband bought more than 30 years ago.
The right decision for Jeannie and many other seniors
It’s been four years, and for Jeannie, it was the right decision. A reverse mortgage has eased her cash-flow problems and improved the quality of her life. For many older homeowners, a reverse mortgage is the ideal way to supplement retirement income, consolidate debts or cover expenses like health care.
Accessing your home’s equity and using it like a savings account
A reverse mortgage is a type of loan that’s designed to give people access to the equity they’ve built up in their homes. In Jeannie’s case, this was considerable—a lovely home in Pasadena that they bought 30+ years ago that was paid off. The borrower gets what is, in effect, a tax-free advance on their equity, in the form of a line of credit, fixed monthly payments or a lump sum. For most reverse mortgages, homeowners must use the proceeds to pay off their existing mortgage; the remainder of the loan comes due when the owner moves, sells the house or dies.
Available to homeowners 62 and over, reverse mortgages are somewhat complex, and they can be risky. With a target audience of potentially vulnerable seniors, scam artists have proliferated, drawing homeowners into bad or outright bogus deals. While the scams vary, the premise remains the same: The scammers want to put the home equity these seniors have spent years accumulating into their own pockets.
Beware a group effort by a team of real-estate industry scammers
It’s often a group effort, with unscrupulous mortgage brokers or financial advisers joining forces with corrupt appraisers, attorneys and loan officers. They’ll finagle an inflated appraisal of a home’s value, thus inflating the equity and the potential loan, and try to persuade the owner to take out a reverse mortgage. The team of crooks will handle the paperwork, close the loan and come up with a pretext to get the money or even take title to the house.
- These fraudsters might try to sell you on a supposedly can’t-miss investment or financial product.
- A scam contractor may fast-talk you into using a reverse mortgage to pay for home improvements.
- Some scammers target financially strapped homeowners, touting reverse mortgages as a way to avoid foreclosure or get out of debt.
- They may charge fees running into the thousands of dollars to provide information about reverse mortgages that’s actually available for free from the U.S. Department of Housing and Urban Development (HUD).
In California, you’re required to meet with a HUD counselor
Note that for a legitimate reverse mortgage in California, you must meet with a reverse mortgage counselor approved by the U.S. Department of Housing & Urban Development (HUD). This counselor is trained to make sure you thoroughly understand the benefits and risks of reverse mortgages.
Warning signs of reverse mortgage scams
- A broker or lender uses high-pressure tactics to try to talk you into a reverse mortgage.
- They claim the loan is safe because it’s insured by the Federal Housing Administration (FHA). The FHA does insure some reverse mortgages, but that coverage doesn’t protect the borrower; it’s for the lender, in case of default.
- They don’t disclose the fees, conditions and risks that come with taking out a reverse mortgage, including the possible loss of the home, which serves as collateral.
Tips for avoiding scams. Do not:
- Respond to unsolicited advertisements.
- Sign anything that you do not fully understand.
- Accept payment from individuals for a home you did not purchase.
Be suspicious of anyone claiming that you can own a home with no down payment.
To report a scam: AARP Fraud Watch Network Helpline. 877-908-3360
A Living Trust: One of the most thoughtful things you can do for your family
A Living Trust is a legal document that contains instructions for what you want to happen to your assets when you die. For my family, it meant that when my parents died, all of their affairs were in order, they had transferred all of their assets into the Living Trust and identified their heirs. Without a Living Trust, their estate would have gone into Probate and my brother and I would have been dealing with this long, expensive process—even while mourning the death of our parents.
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